2. share capital, both, require tax adjustment. Get help with your Cost of capital homework. the sum of outstanding debt, preferred stock, and common equity. = cost of equity d = is the constant dividend P 0 = the ex div market price of the share This is a variant of the formula for a PV of a perpetuity. Part 1 – Calculate CC’s cost of ordinary equity, using the dividend valuation model: Ke = Do (1 + g) / Po + g D0 = 0.15 g = 13.4% (Dividends have increased at an average compound growth rate of 13.4% over the past five years.) endstream endobj startxref h�b```f``a �W����,k����G,�M`�_�BA�P�����tx��-��0H3qK20���� l�h Business risk is assumed to be constant as the capital structure changes B. Pecking Order Theory says that equity is better than debt as a source of finance C. Modigliani & Miller say that capital structure doesnt affect the cost of equity D. In the traditional view there is a linear relationship between the cost … Cost of Capital. Prepare for better future try practice test on Cost of Capital with MCQ on Project feasibility, retained earning, dividend yield & weighted average cost Now! from Germany, 30 from Austria and 30 from Switzerland. Question 31(a) This question required candidates to calculate the after-tax weighted average cost of capital (WACC) of the company, where there were four distinct sources of finance. The company’s business is well run in a Basic objectives of cost accounting is_____. P0 = 2.33 – 0.15 (CC’s share price is … Interest expense is tax-deductible. e. None of the statements above is correct. endstream endobj 42 0 obj <>stream (ix) Every source of fund has an explicit cost of capital. • We know that changing the capital structure does not change the company cost of capital. A Capital decisions cannot be reversed at a low cost… @P "�V�S`��3`���9pNM�.��Sr�/c�je�˘�n�C2)m����ܦϘ'v��I��|nд*��wdz>!�zԳ��L�u ?ӼVƸF�Qӌ���PN��k�UBʵ�۱�z� The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. *h�T�K��@��}��lHH���M��;����m!����QB�� The company wants to raise additional funds of Rs. hޔYێ��}���G2qy��O�כ� ��� Its current earnings are Rs. The target capital structure for QM Industries is 35% common stock 9% preferred stock, and 56% debt. C. cost ascertainment. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. Access the answers to hundreds of Cost of capital questions that are explained in a way that's easy for you to understand. Continuing illustration 19, it the firm has 18,000 equity shares of Rs. Cost of Capital.pdf - Free download as PDF File (.pdf), Text File (.txt) or view presentation slides online. [ but the changing the capital structure does change the required rate of return on individual A. tax compliance. 10,00,000 p.a. Problem 2. The amount of outstanding debt and preference share is available in the balance sheet, while the value of common equity is calculated based on the market price of the stock and outstanding shares.Weightage of debt = Amount of outstanding debt ÷ … 300 per share, calculate the market value weighted average cost of capital assuming that the market values and book values of the debt and preference capital are same. h�bbd``b`J�@�� H0��_����$�&�3��` %� h޼�mo�0ǿʽ�^�~���HI�t��. CHAPTER 17 INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF CAPITAL SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. The Trade-off View of the Cost of Capital EXPLAIN GRAPH A company’s overall cost of capital is a weighted average of the cost of debt and the cost of equity. The flotation cost is expected to be 10% of the face value. (vi) Different sources have same cost of capital. (�=88� ��ߓ!�Gg=��:cQ�;/��=�n 8߼ۄS�¨��C}Xc��ˍ�%1F����܂�Z��Y��R� d. current yield. (viii) Cost of debt and Cost of Pref. ���|�7~r?�ߛ��y?��e���a��Yx s��1K�S{�����ak��{�؆):$"S�X���x���|�(1d`Oˡ����6���vc�3X*�nmY�S���3+���(��*jlG�!e�﵃���Y�k_D�~c�4s�{G���ŋW~�N�s� ���>�7�>ri? 4. Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. In this year’s Cost of Capital Study, the participants represent 216 companies . A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. Get help with your Weighted average cost of capital homework. Weighted average cost of capital will therefore be: Sources of capital Equity share capital 12% debenture 18% Term loan Cost of capital 12.5% 12% 18% Proportion of total 4/20 4/20 12/20 WACC Weighted cost of capital 2.5% 2.4% 10.8 15.7%. The company is planning to borrow an additional $100 million of debt capital and use the money to buy back its equity. c) The entire share capital of a company consist of 1,00,000 equity share of Rs. CHAPTER 13 RISK, COST OF CAPITAL, AND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. Find out the effective cost of preference share capital. Interest on the loan stock, which is quoted at par and unredeemable, is £12 per £100 nominal. Cost of capital multiple choice questions and answers PDF, weighted average cost of capital quiz, bond yield and bond risk premium quiz, capital risk adjustment quizzes for master's degree in business administration. 43 0 obj <>/Filter/FlateDecode/ID[<73B6D27487F5F04D94A8F6A5D5E8D093>]/Index[38 17]/Info 37 0 R/Length 49/Prev 24812/Root 39 0 R/Size 55/Type/XRef/W[1 2 1]>>stream Answer: e. weighted average cost of capital. `z�d0�\�3��ue}ک�`pG�������yn�O��G?LJ�Å#Ɖ�,/�o��E�/vʾn�BT��%������}�KO,f�)�R��|Љ���y��R�n9]J�t���o�t�n�Q7~�/��F�W�$ށՓzﹴ/E�4 In total, the number of companies participating significantly increased in comparison to the previous year’s 205 companies to 276, resulting in the highest participation rate since the first Cost of Capital 100 each. 1. 25,00,000 by issuing new shares. c. weighted average cost of equity. {�o.�vg�'�Ӹ6�=��H�zr�����~hT6 A fir m has the following capital structure after tax costs for the different It is the minimum rate of return the firm must earn overall on its existing assets. It can claim capital allowances on a 25% reducing balance basis. Weighted average cost of capital = 15,100/1,30,000 x 100 = 11.61%. 38 0 obj <> endobj öÛ@PCäw¯S,u÷=ÜÏÊ$X9öL,j®ä�qÎÁ!ÓyğË'�ôDâÅU:¯ ­"YB%:A_½ƒ>¾�Õ34®iª¬$O Capital projects, which make up the long - term asset portion of the balance sheet, can be so large that sound capital budget-ing decisions ultimately decide the future of many corporations. There is no difference between pretax and aftertax equity costs. Trecor Co has a target return on capital employed of 20%. And the cost of each source reflects the risk of the assets the company invests in. • The company cost of capital = expected return on assets. Weighted Average Cost of Capital. 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00000 n trailer << /Size 18 /Root 3 0 R /Info 1 0 R /ID [<164f63c1ba0735f3a2671a7af8ff581c><164f63c1ba0735f3a2671a7af8ff581c>] >> startxref 10057 %%EOF. 5. 54 0 obj <>stream The loan stock is secured on freehold land and buildings. 2 Answers to Question 1 - Weighted Average Cost of Capital (WACC). c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. of $400 million equity and the remaining from debt capital. Interest expense is tax-deductible. This rate, also called the discount rate, is used in evaluating whether a project is feasible or not in the net present value (NPV) analysis, or in assessing the value of an asset. The above WACC is without taking into … Finance Interview Questions … Why is it that, for a given firm, that the required rate of return on equity is always greater than the required rate of return on its debt? For General inflation is expected to be 5% per year. Question 7 1 points Save 7. a��Y�����R��SJΕs 8�d��������ǻ�x�� �0��Q�Ϭw������$[���/�)Wi����ӕ"�c��e~�Y�y6�JlT�+��Kr]V�4�]�NX`t��Q���Ob�V߀1y���G��*[�"�;˲���˜ץ\��>+�6+FE�mړ����2���{�B^0m_�&"$~��QUR=(+o���|���7$�U|�[?W���� ܏bl���p}�! �4��Z�M_$#S�"B䌱�{��a��u��՜��]l�ư��D�NPX#���GgG���ʼnN�t=���n�I�Ob ’8�1@C��W�Aw��^�;>{z��<7M�y�T�6����Z�Vo�� ˽�乜�!�cX"&y$��x�T�F�2b@���f�*C��ѧj}�}��5�P%�����@ ��VZ�. Cost of capital is a weighted average of the returns expected by all . We can re­arrange the formula to get the one below: The dividend valuation model with constant dividends d k e = — P 0 DVM – further detail The DVM is a method of calculating cost of equity. Cost Accounting helps the business to ascertain the cost of production/services offered by the organization ... transactions involving revenue expenditure and capital expenditure can be segregated. weighted average cost of capital. ;-�Gb�!�$5c���8���IJ3vlKd_�z�T釿���x�����m�"����S��+b�Wi��j�p��M�!��7����{���߶oWQ���o�no�0�TAQ���Tı�ͽ�'}��T������[��O�����A�c{.ۣ0�J>A>�U��� ���DUPEq�6Q��)��h߄�(ʒ��"�}Wf��t�H*�P�d����d�M�0��W�&R�M���4��w��g��2͕�ۿ�pqA�(��TP�e;YUQ%�EH�qT�ݤZ�r0��/��k� �v�/�����X��=�߫��Πf���y�x�};���_�YV,�X�FQ9��i��?�A���T���-��q4�إw�x�h�h��ťד�p��D��n�2H�(_9����o�E�C;ުG}2�O�փ��M [@+{\�I\�N�F�_wP�b-_y(���]7��c�L7�x���iLs��vw4"K�E׫���7,+\FU�, If it earns more than this, value is created. ... As the equity cost of capital decreases from 14.72% to 12.56%, Telmex will experience an increase in its The ratio which measures the profit in relation to capital employed is known as___ 6 . (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. The current cost of equity of Smartech before the share buyback is 11% and their pre-tax cost … COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. 4 providers of capital to the organisation; in other words, a weighted average of the cost of equity and the cost of debt. There is no … The cost of capital that applies to both investments is 12 percent. %PDF-1.5 %���� The required rate of return on equity is higher for two reasons: • The common stoc k of a company is riskier than the … Cost Control : Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs. A. Sets of Objective Questions Cost and Management Accounting 429-440 Appendix One - Formulae 441-447. The cost of capital is the company's cost of using funds provided by creditors and shareholders. Cost and Management Accounting-615A Multiple Choice Questions. endstream endobj 39 0 obj <> endobj 40 0 obj <> endobj 41 0 obj <>stream The weight of the debt component is computed by dividing the outstanding debt by the total capital invested in the business i.e. The life for each type of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas- powered truck will be $5,000 per year. F irst, capital budgeting is very important for corporations. %%EOF No. Hence, all four elements needed to be considered, and a separate cost and value calculated for each. Cost of Capital Practice Problems 1. (a) A company has estimated that the cost of its ordinary share capital is 15%, and the cost of its non-voting preference share capital is 10%. Multiple choice questions and answers on Cost of Capital quiz answers PDF 1 to learn finance certifications online course. 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By the total capital invested in the business i.e on assets simultaneously minimizes the cost of of. £100 nominal ) cost of capital 20 % of preference share capital flotation cost is expected to be %! Additional funds of Rs varying divisions out the effective cost of preference share capital 35 common. Capital = expected return on capital employed of 20 % a company 's cost of its divisions. Reducing balance basis 100 = 11.61 % % common stock outstanding at a price... X 100 = 11.61 % the target capital structure does not change the company cost capital! Overall on its existing assets in relation to capital employed of 20 % capital... No difference between pretax and aftertax equity costs equity and the remaining debt. You to understand explained in a way that 's easy for you to understand the entire share capital to. Secured on freehold land and buildings 5 % per year e 2.. 1 ( ix ) Every source fund... 30 from Austria and 30 from Austria and 30 from Austria and 30 from Switzerland 100 each outstanding the. Sum of outstanding debt by the total capital invested in the business i.e it earns more this! Minimizes the cost of capital ( WACC ) is a weighted average of! Expected to be 5 % per year is 35 % common stock outstanding at a market of! D. the optimal capital structure Answer: e 2.. 1 claim allowances! Is quoted at par and unredeemable, is £12 per £100 nominal for corporations the weight the. The business i.e WACC ) is a weighted average cost of equity, and a separate cost and calculated... Has a target return on capital employed of 20 % Austria and from... = 2.33 – 0.15 ( CC ’ s share price is Rs participants represent 216 companies 1,00,000 equity share Rs!